How Americans Game the $200 Billion-a-Year 'Disability-Industrial Complex'

Ronald Reagan, conservative hero, did much to loosen the eligibility criteria for Social Security disability benefits, thereby increasing the possibilities for waste, fraud, and abuse. (Photo credit: Wikipedia)

If you’re a regular reader of this blog, you know that America’s health-care entitlements—Medicare, Medicaid, and Obamacare—are the biggest drivers of our exploding federal debt. What you may not know is that there is a fourth program, that pays disability benefits through the Social Security Administration, that is also growing at an alarming pace. While part of that growth can be explained by the aging of the U.S. population, the largest factor in the proliferation of disability spending comes from the fact that Congress has dramatically expanded the definition of who gets called “disabled.” As a result, many able-bodied Americans have been granted government paychecks for life, crowding out our ability to direct needed resources to the genuinely infirm.

The story of the growth in federal disability spending has been percolating for years. The Great Recession of 2008 led to a spike in unemployment; many people who had difficulty finding work discovered that they might be eligible for Social Security disability benefits, benefits that would replace a significant portion of their previously earned wages, while also qualifying them for Medicare, our generous health-insurance program for the elderly. Today, the United States spends around $200 billion a year, literally paying Americans not to work.

Disability insurance has replaced welfare

As the below chart shows, the last three times the unemployment rate has gone up due to recession—in the early 1990s, the early 2000s, and the late 2000s—applications for Social Security Disability Insurance have spiked. The green line is the unemployment rate; the blue line is the number of disability applications per 1,000 adults.

Some people—most notably the trustees of the Social Security Administration—argue that the growth in disability spending is driven by the fact that the Baby Boomers are starting to retire. Older people tend to have more health problems, of course, than younger people.

But two prominent disability researchers at the National Bureau of Economic Research, Mark Duggan and Scott Imberman, have come to a different conclusion. In a 43-page paper on the topic, they found that only 13 percent of the growth in the receipt of disability benefits in men was due to aging of the population; for women, it was 4 percent. (The difference between men and women comes from the fact that women only recently entered the work force in large numbers.)

Reagan relaxed disability eligibility criteria

But the biggest driver of all, according to Duggan and Imberman, was relaxation of the medical eligibility criteria, which accounted for 45 percent of growth for men, and 36 percent for women. The second biggest driver was the economic value of the disability payments, which has grown over time, due to quirks in the formula used to generate them. Other drivers included payments into the Social Security system; overall economic conditions, like the recessions we discussed above.

However, contrary to various rumblings on the right, President Obama is not responsible for relaxing the eligibility criteria for Social Security disability payments. In fact, the sea change that has brought about what NPR calls the “disability-industrial complex” was signed into law by…Ronald Reagan.

In 1980, Jimmy Carter had signed the Disability Amendments Act of 1980, which encouraged tighter oversight of Social Security disability benefits. Early in Reagan’s first term, the Gipper asked the Social Security Administration to step up enforcement of the new law, leading to the revocation of benefits for over one million people. There was a substantial political backlash to these efforts; as a result, in 1984, Congress unanimously passed the Social Security Disability Benefits Reform Act. “It maintains our commitment to treat disabled American citizens fairly and humanely while fulfilling our obligation to the Congress and the American taxpayers to administer the disability program effectively,” said Reagan upon signing the bill into law.

The SSDBRA instructed the government to place greater weight on applicants’ own assessments of their disability, especially when it came to pain and discomfort; to replace the government’s medical assessments with those of the applicants’ own doctors; and to loosen the screening criteria for mental illness, among other things. The overall effect was to create a giant loophole, by which an applicant’s subjective claim that he was in pain, or mentally incapacitated, would be enough to claim disability.

The numbers back this up. While Americans may be gaining weight, they suffer from fewer disabling conditions than they did 40 years ago, thanks to advances in medical technology. Two charts illustrate this phenomenon. The first is from a paper published by the Center for American Progress and the Brookings Institution, showing that while traditional medical causes of disability—cancer, stroke, heart attacks, and the like—have stayed relatively constant, Social Security disability benefits have exploded for people with musculoskeletal and mental disorders.

The second chart, from a new NPR investigation of the issue, does a nice job of mapping out the difference in who the government gives disability benefits to today, relative to 50 years ago. Diagnoses that lend themselves to subjective manipulation, like back pain and mental illness, have grown substantially.

And it’s not just medical diagnoses that are driving growth in disability payments. Being a high school dropout now increases one’s likelihood of gaining disability benefits, because high school dropouts are considered to have a lower likelihood to rejoin the workforce.

The other big driver is increased disability payments

The other key driver of growth in federal disability spending, Duggan and Imberman found, is the size of the government payouts. The Social Security Administration pays out benefits in relation to how much money you made when you were working, with some means-testing considerations thrown in. The overall effect is to replace the majority of your income if you’re poor, and a smaller fraction of your income if you were well-paid in your previous jobs.

The problem, according to Duggan and Imberman, is that two changes—an expansion of the amount of money that is subject to Social Security taxes, and a growth in the dispersion of income—have resulted in low-income Americans gaining higher disability benefits, relative to their prior income.

Indeed, the Duggan-Imberman analysis underestimates the impact of the disability benefit, because they didn’t count the value of health insurance. Every American who qualifies for disability insurance through the Social Security program also automatically qualifies for Medicare, regardless of age. And as Medicare spending has gone through the roof, the value of that Medicare benefit has skyrocketed also.

The authors acknowledge this limitation in their work. Medicare growth suggests “that the incentive to apply for [disability insurance] will increase with the rising value of health insurance through Medicare. Some recent research has…suggested that it can explain as much as 20 percent of the growth in [Social Security income] receipt.”

SSDI program to go bankrupt in 2016; reform is urgent

Like all of the other federal entitlements, Social Security Disability Insurance, or SSDI, spends more money than it takes in. The SSDI trust fund is set to go broke in 2016. The only way to change that trajectory is to raise taxes, or to reduce future disability spending.

We all want to make sure that people who are truly disabled get the help they need. But as the NPR report shows, there are a lot of people gaming the system, people who are taking needed money away from those who have no ability to rejoin the workforce.

There are dozens of things we can do to create a fairer and more rational system for protecting the disabled. Two of the most obvious would be to revisit the 1984 changes to the medical eligibility criteria for disability, and to reform the payout formula such that the disability trust fund avoids bankruptcy.

There are many other avenues for reform. I was on MSNBC last Friday with Michael Astrue, who recently stepped down as Commissioner of the Social Security Administration. Astrue adamantly defended the disability program—insisting that “less than one percent” of federal disability spending was the result of waste, fraud, or abuse—a figure that strains credulity. Astrue also co-signed a histrionic letter, penned by a group of former Social Security commissioners, accusing NPR of encouraging “drastic changes” to the disability program that would “threaten to pull the rug out from under millions of people with severe disabilities.”

Quite the opposite, in fact. Reducing waste, fraud, and abuse in the disability program through modest, incremental changes would allow us to devote more resources to the severely disabled, not less. Indeed, on MSNBC, Astrue did say that he had asked Congress for more funds to conduct medical examinations of people on disability benefits today, to make sure they were truly disabled, and that Congress refused. This seems like something that Congress should revisit.

This article has already gone on long enough, so I’ll stop there. But this is a large and growing issue, and I will have more to say about it in the near future. It’s not just about the fact some people are taking advantage of the system. It’s about the fact that taxpayers are paying able-bodied Americans to drop out of the work force, increasing the burden on those who are still working. That, in turn, makes it that much harder to keep our fiscal situation under control, and harder to provide for the truly disabled. If these issues matter to you—and they should—keep an eye on this space.

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Avik Roy … We definitely need to talk. My retirement income is composed of income sources related directly and exclusively to my employment. I have an identical twin brother, who has been getting SSDI payments along with his family members (he has 7 children) for decades. He uses the back pain eligibility criteria, I believe. A comparison between his education, employment, motivation, and resulting material wealth as compared to mine would enlighten many, many people in this nation if they knew this story. I am willing and able to open up my life to you should you want to conduct such a comparison, if certain safeguards pertaining to my privacy could be made through such an endeavor.

It is the case that there is an increasingly large number of interest groups looking for an increasingly large share of a shrinking federal pie. Since social security was inacted, Congress and Presidents have added more benefits categories with little regard of how to pay for them. Disability is only one of these, but alone has created a category of citizens that manipulates the system for their own gain. I have seen it many times by those that seem to think that the government owes them something and they are going to get it. It is unfortunate to see those that truly have a disability have to take a back seat.

Maybe if the government used more accurate data to determine Unemployment (data that includes disability) then we would see better options for people instead of going on disability. This blog post takes a look. http://www.statisticsblog.com/2013/03/minding-the-reality-gap/

I’d be interested in how many folks don’t really qualify. The biggest problem such a review would run into are folks like me. After a long running bout of hypo-thyroidism and sleep apnea, I have several niggling problems because the thyroid problem persisted for years and I was at the point of being physically incapable of getting out of bed when I found a doctor who knew what to do. The previous six had never looked at my thyroid.

Anyway, the results are an inability to stay awake at times. I look pefectly healthy but I was unable to return to the IT management I had been doing. I tried selling cars, but falling asleep at my desk didn’t cut it. Fortunately I’m retired. My wife has a mental illness that came on a little later in life than normal. Her last attempt at a job resulted in being fired and marked not elgible for rehire, because she frightened others. Juswt be careful when checking these peoploe out.

The benefits from going on disability are actually higher than they are for early Social Security at age 62. In my case, the disability benefits at about age 62 would have been about the same as full Social Security benefits at age 66. If someone has little or no savings and is unemployed, there certainly is an incentive to claim disability benefits, even if it means stretching the truth.

Governor Ronald Reagan also signed laws increasing California’s maximum personal income tax rate from 7% to 10% and then to 11%. Read here:

Having prepared prehearing briefs as a clerk at a law practice that focused on disability claims, I believe that the system generally gets it right at the hearing stage, and is getting better. My job was to review the case files which generally consisted of between 200 and 1,000 pages of documentation. The majority of these documents were; medical files, consultative medical examination files, and residual functional capacity assessments. For what it’s worth, my admittedly unscientific impression at the time, was that something like 40% of the files I read were for claimants who were clearly deserving of benefits (they often had severe disabilities that I wouldn’t wish on my worst enemy). Another 40% were for claimants that I didn’t consider deserving (they might have some disabilities, but my impression was that they’d still be able to perform some form of work). The final 20% were for claimant’s who were somewhere in between (these might be claimant’s that had little education, were close to retirement age, and no longer were able to perform their previous job, but might be able to perform a desk job, if they were retrained). Our firm won about 55% of our claims, which led me to believe that we won all of the claims that I felt were clearly winners, lost all of the claims that I thought were clearly losers, and won about 75% of the claims that were somewhere in between. This struck me as a just outcome. There clearly has been some past abuse of the system, and some may be ongoing. For example, I read an article a year or so ago about an administrative law judge who awarded benefits in 98% of his hearings, and heard an unusually high number of claims. It seems to me that such outliers would be easy to spot and correct. There have also been some recent reforms which prevent the cherry-picking of such judges. For example, the judge who will hear your claim is now randomly assigned and their name is kept confidential until the time of the hearing. The education of the claimant is considered by the ALJ when making their ruling, however, a lack of education is not particularly helpful unless the claimant is approaching retirement age and is clearly unable to perform past work. For example, an auto-mechanic who has less than a high school education and recently lost his ability to walk would be found to be limited to sedentary work. If this mechanic is younger and has no other disabilities, he might not be found disabled because he is able to be retrained to perform a sedentary job. If the same mechanic were nearing retirement age, his age and lack of education will be considered and he may be found disabled, because he cannot perform past work, and is considered to be too old to be retrained to perform a sedentary job. Additionally, sometimes, claimants who have a combination of impairments that might not appear to be severely disabling, are awarded benefits because employers tend to be very strict with schedule compliance for unskilled workers. For example, an uneducated, unskilled claimant that has an impairment requiring 30 minutes of unscheduled breaks per shift (in addition to their scheduled breaks), wouldn’t be disabled, if the vocational expert were able to point to jobs available somewhere in the national economy that would allow such breaks. Unfortunately, for somebody with a GED, border-line IQ, and an unskilled work history who is suffering from severe encopresis and mild to moderate schizophrenia, such employment opportunities don’t appear to exist. A few additional points. A benefits award doesn’t, necessarily, mean the claimant will receive benefits for life. Their disabilities are periodically reevaluated. The share of newly disabled workers, by diagnosis chart is probably misleading, because many claimants are awarded benefits based on a combination of impairments. Finally, no distinction is made in your article between SSI and SSDI. SSDI is a disability insurance program for workers. Many, if not most, disabled only qualify for SSI which is a welfare program that pays a very small monthly benefit that tops out at something like $800/month. I can’t imagine too many people would opt for such a benefit rather than work unless they were truly unable to work.

American: “…considered to be too old to be retrained to perform a sedentary job.”

By whom? What is the definition of “too old” and why can’t they learn a new skill? If they’re not senile or mentally ill all of sudden, there’s no reason they can’t be retrained to perform a sedentary job.

Perhaps what you’re implying is that companies will not hire (in order to retrain) a 60 year old regardless of their ability and willingness to learn and be productive.

Right. Any HR representative will tell you it takes a couple of years for an employee to learn a job well enough to reach maximum productivity and training someone new skills when they are this close to retirement is not a good investment for a company. Also, older employees use health care coverage more than do younger workers, so more time lost on the job and the company-paid health care coverage premiums go up because more $$$ are being spent by older new hires.

“If this mechanic is younger and has no other disabilities, he might not be found disabled because he is able to be retrained to perform a sedentary job.”

This points out one of the major flaws in the system (which I spent far too much time in). If you are classified as disabled, you can get benefits that include training for a different job that you are able to do. However, if you are not classified disabled, you are not eligible for any retraining whatsoever. So people who cannot continue their existing job but might be able to do a different job aren’t eligible for training for those different jobs because they may be able to do them. Wash, rinse, repeat. That sort of inverted logic is pretty much par for the course for the federal disability system, in my experience.

That does not address what is probably the greatest problem, though. If 40% of the clients had clearly reasonable claims, then why did they need a lawyer (I’m sure the majority only contact one after initial denial)? If another 40% clearly do not have a valid claim, why are they filing? Granted, there is clearly a strong selection bias, but shouldn’t the majority of cases be the borderline ones? That the majority are pretty clear cut highlights (in bright blinking neon) that there are major flaws in the SSI/SSDI selection criteria. I suspect this is the rule, not the exception, among federal programs.